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BookingAlpha Option Trading Advisory

Tuesday, October 14, 2014

November 2014, RUT Credit Call spread

The market's not overbought. However, today I sold a Credit Call spread on RUT

Here are the details:

Sell 2 RUT November 1150 Call @3.14
Buy 2 RUT November 1160 Call @2.14

Credit: 1.00 ($200 for 2 contracts per leg)
Max Risk: 9.00 ($1800)
Days to expiration: 37

I normally don't sell Calls if the markets are not overbought. Today I had to make the exception due to the fact that I have 3 Credit Puts spread in November and no Credit Call spreads at all. So, if the market rallies, the 3 Put spreads will make me happy and I won't care so much about being hurt on a Call spread. If the market keeps falling, it'll suck, but it'll suck a little bit less than before because at least I will be making money with this Credit Call spread.

As for the exit strategy, I don't think I'll hold it until expiration. I'll probably be closing it at 0.30 - 0.40 debit if that ever happens. I don't want to wait until expiration in this case as November is historically a strong month and this Call spread was not entered during what I call "ideal" circumstances.

As usual, a chart for future reference:
(Click on image to enlarge)

Current positions after this trade:

October RUT 1230/1240 Bear Call Spread
$220 credit. Will expire this Friday for max profit.

November RUT 970/980 Credit Put Spread
$120 credit. 83% probability of success and 37 days to expiration. Now part of 970/980/1150/1160 Iron Condor. Will adjust if RUT goes down to 1030 this week.

November SPX 1755/1760 Credit Put Spread
$120 credit. 80% probability of success, 37 days to expiration. Will adjust if SPX hits 1845 or so this week.

November RUT 910/920 Credit Put Spread
This position was opened as part of the adjustment to the 1020/1030/1234/1240 October Iron Condor. $201 credit. 96% probability of success, 37 days to expiration. Closing it for 0.20 debit will totally cover the loss on the October Iron Condor. I want to close it for that price, but maybe end up  happy with 0.30 debit or so.

November RUT 1150/1160 Credit Call spread
$200 credit. 37 days to expiration. Will help me mitigate the excessive downside exposure on the portfolio.

I'm not gonna lie. This is a very challenging time and the portfolio is in an emergency situation. In spite of that, I am confident that I can control the disaster and minimize the portfolio draw-down as adjustments on the Put side with a high VIX environment would allow me to go very far out of the money. We're talking RUT options below 900 and SPX options in the low 1600's. Those should stop the bleeding. If no adjustments are needed, much better then!

Check out 2014 Track Record

Related Articles
Weekend Portfolio Analysis (October 18, 2014)
Weekend Portfolio Analysis (October 25, 2014)
Credit Call spread has to be adjusted to 1180/1185 (October 28, 2014)

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  1. I know why you did it and I know you will be disciplined enough to close it when it turns out to be a losing trade. As much as I need some short hedges like you I cannot sell credit call spreads here. I got in trouble last year when I sold credit call spreads too soon. A rising market and a low VIX is a very bad combination. I am not saying that will happen but it is a possibility.

    Another way you could have done this was to buy some debit put spreads on your two threatened positions.
    For example to protect your Nov RUT 980/970 cps, you could have bought 1 contract of Nov RUT 990/985 debit put spread for .80 debit. To protect your Nov SPX 1760/1755 cps, you could have bought 1 contract of Nov 1770/1765 debit put spread for .70 debit. You will be out a total of $150 before commissions.

    If the market rallies this month, you can carefully choose a far OTM credit call spread to sell to give you an opportunity to make back the money. If the market goes lower this month and you are forced to adjust those positions, you can sell your protection for about triple the money. The profits you get will offset the adjustment cost. And if you were lucky enough to sell some credit call spreads too, your adjustment should be a breakeven trade.

    Today I bought some Nov IWM 100/98 debit put spreads for .35 debit. This is to protect my Nov 97/95 credit call spreads and to give myself some protection in case we go lower this month.

    You can follow me on Twitter @lienjonathan where I tweet my 90% probability credit spread trades in real-time for free.

    1. Nice thinking....I'm thinking of protecting the Nov 980/970 RUT credit put spread (1 lot) with a 1000/990 debit put spread (1 lot) and a 930/920 cps (2 lot) or something along those lines....margin goes up but then so does peace of mind :)

      Cheers, Motu

  2. I didn't want to sell Calls either at the prices RUT had closed on Monday. That's why I waited for the high of the day today. In fact I didn't wait, I left a pending order for 1.00 credit and left. I knew if that ended up getting filled it was because RUT had rebounded to around 1170. Not ideal, not overbought, but certainly not selling Calls with RUT near the lows around 1150.

    I also thought about going long some premium. It could have been a good idea. The point there would be, when to take your profits as you have time decay working against you in those positions. Probably worth some time on a serious study in that area.

    Anyways, we'll see. Getting hurt on one Call spread while having 3 Put spreads is not that bad.